Why Would a Founder Offer to Split Their Equity?

by Employee Share Ownership on March 31, 2017

Depending on your company, at some point formalisation brings tough questions. Even if you’re incredibly lucky and everyone is prepared to face these questions without any qualms, the answers still may not be simple. Careful consideration of important questions will include your situation, and where you’d like it to go. With some writers warning not to make equity splits even, here’s a more esoteric look at key aspects and approaches on how to split equity among co-founders of a start-up:

Identify the Irreplaceable Talent Everyone Brings

Talent is one of the mysteries of nature. No one knows ultimately how someone can walk a tightrope anchored between two skyscrapers, without becoming a victim to their fear and without making a fatal error. Talent, raw or trained, is a gift and there are many types of talent in our world.

Some talents are unique and must be valued as such when considering the value brought to the table by that team member. Talents in business range in areas from engineering or art, to sales and marketing. The contribution to your start up by these talents may seem intangible at first, but the creation of a niche by the company may rest undeniably on their presence. To attract and retain talent most people in the start up world use employee ownership to top up cash salary, especially when cash flow is really important in the first 12 months.

Finding Tangible Skills of Co-Founders

Every team member will have a different background and therefore a different set of skills. A scientist may have spent at least three years gathering the knowledge and investing financially in themselves to bring their developed skills to the company. On the other hand, a computer expert may be formally or informally educated, but has spent time gaining experience and knowledge that makes them part of the company, for that reason. One example of a start up with a simple mix of experience is Otto, who’ve recently won a ‘Hot New Start-up’ award. Founders and employees are usually rewarded through equity and where possible using the new employee ownership plans for startups that was championed by EOA.

Inspiring Qualities and Intuition

“I am convinced that different people awaken different beasts in you” by Michelle K

You already know now different members of your team have different qualities, and inspire you and each other in certain ways. You will have a reasonable intuition about this. But, have you thought in detail about your interactions? The weight of the psychological impacts that each team member has and the influence they commit to the company with their presence is imperative. Where will you go, with the weight of the influences you’re given? All of this gives rise to matters of future direction, such as equity, vesting and dilution.

Financial Grit

The ‘solid’ aspect of allocating equity might be considered to be the financial one. If one person is financing or providing security for a loan, then they will usually want a fair and direct share of equity in the company for that contribution. So, this aspect might be relatively simple if you have an angel investor! If they’ve given a specified amount of equity they want, then you may not have room to move from that. There are different ways, though, to tailor financial arrangements for the company, and some are well described on the Lend website’s guide to small business loans in 2017. The site includes some information on alternatives to bank lending.

The guys at startupsmart have made a list of top government grants, including what superseded ‘Commercialisation Australia’.

Finally there is employee ownership where it is not a top up to salary, attracting talent or a co founder taking some of the equity to join you. Most unlisted companies use loan plans to help their employees buy a stake in the company.

Evaluating Skills Holistically

There is no single way to answer this but if you were a single, ‘one right answer’ person then you probably wouldn’t be involved in a start-up. The Foundrs site provides a questionnaire designed to help articulate who is contributing what to a start-up. It also has a link to the Silicon Valley Start-up Conference 2017 information, for those interested in an exciting work trip. For Australia, Bluechilli have events during February and in Sydney, October 2017 brings Sparkfest.

To fully comprehend how equity genuinely begs to be split, though, all of the above and maybe more need to be looked at. These aspects need to be examined, discussed, and examined again. They’re about allocating responsibility, and that’s not a serious word for nothing. A deeper feeling and a true intuition is perhaps the best that could come of this, and that cannot be prescribed with any one formula. Authentic discussion itself and the equity split can signal the directions your start-up can take you in; enjoy all these as the journey.

“To be successful, you have to be out there. You have to hit the ground running and if you have a good team around you, and more than a fair share of luck, you might make something happen. But you certainly can’t guarantee it just by following someone else’s formula.” – Richard Branson